Market Recon Friday (Jobs Day)

Good Morning,

Oil / Losing Streaks.

Forgive me in advance for the length of this morning letter. There is a lot on your plate this morning, so aside from what is pertinent to your daily attempt to create and/or preserve capital, I will keep this as brief as possible. The financial markets are still up against a couple of losing streaks. Eight days for equities, and five for oil. Those five, however have caused far more carnage in that space than the eight have for stocks. Crude will remain a factor greater than itself, as the correlation between black gold, and the S&P 500 though not perfect seem more on than off when WTI Crude trades sub $50. OPEC does not meet until 30 November, and the games will not end there. This is likely a semi-permanent market condition.

Trader Focus / Uncertainty.

What is uncertain? Uncertainty is the nature of our business. We all blame uncertainty when we don’t know why, but when are we really certain? The outcome of this presidential election is uncertain. The path of monetary policy is still uncertain, partially because of the uncertainty of that electoral outcome. A week ago, the DXY seemed poised to go through 100. Now, thanks to all of our own uncertainty, and a little “uncertainty” created by the British high court, the US dollar has softened. Should that softness persist, Crude and Equities will find relief from these long losing streaks at some point. In fact, there are so many balls in the air right now for the trading, and investing public that today’s “Jobs Day” data might just have to share the stage in terms of market impact. Should there be an early sell-off today, the levels to watch for S&P cash are going to be last night’s late support of 2085, which was absolutely magnificent, and the spot around 2078. There is a rally out there, waiting to happen. We just may have to wait for some of this “uncertainty” to dissipate. In the meantime, Utilities and Staples continue to be hiding spots.

08:30 -October Employment Situation

Non-Farm Payrolls: Expecting 175K, September 156K.  This single item within today’s report will garner the most attention from both the markets and the media. After back to back months that look rather average as far as job creation goes, we expect to see a minor increase from September in this space for October. To shock the marketplace (move the WIRP), you would probably need to either see a number that starts with a 2, or something south of 140K. Anything else, and the story stays the same.

Average Hourly Earnings: Expecting 0.3%, September 0.2% m/m. Wage growth is probably nearly as important at this point as is job creation. Today’s expectation, if realized would be the second strongest month over monthly increase in this space in the last nine months…. and would be very supportive of tighter monetary policy going forward.

Average workweek: Expecting 34.4, September 34.4 hours. This is a tertiary way of measuring both demand for labor, and income growth.  This item alone is not a game changer for traders, but does contribute to the overall picture.

Participation Rate: Expecting 62.9%, September 62.9%. The Participation Rate as low as it is, actually printed at it’s highest level since March last month. To truly see a healthy labor market, we will need to see this item ultimately move above 65%. This nation is clearly a long, long way from okay, and any talk by Fed Officials that the economy is anywhere in the same neighborhood as full employment is either political rhetoric, or academic naivete.

Underemployment Rate: September 9.7%.  Underemployment has long been the bane of this recovery. The 9.7% level seems to have held for several months now. The good news is that yesterday, Gallup printed their US Underemployment Rate at 12.7%, down from 12.9%. The Gallup Rate, though unadjusted, and formulated differently, does tend to move up and down with this rate from the BLS.

Unemployment Rate: Expecting 4.9%, September 5.0%. Formerly the headline number of this report, this item has for the most part been ignored by market participants for years now, due it’s unrealistic representation of the percentage of potential laborers currently out of work. The markets will watch U-6 over U-3.

Fed Speakers

08:30 – Atlanta Fed Pres. Dennis Lockhart will speak from Orlando, Florida. Lockhart tends to speak in a more hawkish manner than many of his peers, although that now seems to be a common thread. Lockhart, who is not a voting member of the FOMC plans to step down from his post in February.

09:00 – Federal Reserve Gov. Lael Brainard, who is both a permanent voting member of the FOMC, and it’s most fiercely dovish member will speak at a banking conference in Chicago.

12:00 – Dallas Fed Pres. Rob Kaplan is set to speak from Mexico City, Mexico. Kaplan will not vote in December, but he will in 2017. Kaplan has urged caution in raising rates in the past. He will take questions from the media and the audience today.

13:30 – Minneapolis Fed Pres. Neel Kashkari speaks today from Eau Claire, Wisconsin. Kashkari has not been outspoken on monetary policy, and does not vote this year. However, like Rob Kaplan, he will vote in 2017.

16:00 – Federal Reserve Vice Chair Stanley Fischer will speak as the closing bell tolls at 11 Wall Street. Fischer, who is obviously a permanent voting member of the committee will discuss monetary policy since the “Great Recession” at the IMF in Washington. He will open himself up to questions from the audience.

Other Macro

08:30 – Trade Balance (September): Expecting $-38.1B, August $-40.7B. The Goods portion of the September Trade Balance already showed a 5.2% decline, and the same is expected for the headline print today. This number will not impact the marketplace.

13:00 – Baker Hughes Rig Count (Weekly): Last Week 557 total, 441 Oil. Last week, the total number of operating rigs in the US continued to climb, while Oil rigs in operation actually took a breather. Given crude’s recent performance, the number of rigs likely continues to drop, but small.

Friday’s Earnings Highlights

Before the Open: HUM (3.13), USAK (.09)

After the Close: HE (.50)

 

Market Recon Thursday

Good Morning,
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England.
                   The GBP/USD cross has just been impacted by a court case that ruled against Prime Minister May’s authority to trigger Article 50 without Parliamentary approval. Taking that power away from the PM has already caused an early spike in Pound valuations. I would think that this court having overruled the will of the people will face an appeal, but as traders, that’s not our fight.
                    On top of this news, the Bank of England will step to the plate at 8am today. No change in monetary policy is expected. Gov. Mark Carney, who has been criticized for being too aggressive in response to post-Brexit referendum economic concerns, will speak at 08:30 ET. What you’ll likely hear will be an acknowledgement that the immediacy of those concerns was far less urgent than thought at the time. The Governor will most likely back away from his stated intent to get even more dovish if needed than where the BOE took policy back in August. (Don’t forget, Carney is something of a hawk at heart) I won’t delve into the particulars, but what traders need to know is that the British Pound should see some added strength today on that Mark Carney speech, adding to the DXY weakness already seen earlier this week.
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The FOMC.
                    The FOMC really walked a thin line on Wednesday, trying very hard to offer little in the way of a defined direction for the December meeting. Just going off of the CME Group’s website, the probabilities of a December increase stand at 71.5% this morning, but moved everywhere from the mid 60’s to the low 80’s in the aftermath of yesterday’s statement. This quotation from the text is about as non-committal as the FOMC could make it …  “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”  Same as it ever was? Does the “independent’ Fed have a different trajectory depending on who wins the White House? The DXY seems to have gotten this message earlier in the week. The objective here should have been to make intent as clear as a bell to market participants. That job will once again be left up to the plethora of Fed speakers who will restart their collectively heavy schedule on Jobs Day, tomorrow.
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Trader Focus.
                    Trader Focus remains on Oil. The collapsing price of Crude thanks to the unravelling of the OPEC inspired rally that probably never should have been has been front and center. Add to that yesterday’s EIA announced inventory build that took US supplies back to early September levels, and you are left with an Energy sector that has underperformed the S&P 500 over the last week, and over the last month. That weakness this week has come in spite of the US Dollar’s new found softness, a factor that has pushed other commodities such as Gold higher. The national election has taken the spotlight. That will be over by Tuesday. OPEC does not meet until November 30th, and the Fed takes another swing on December 14th before that cast of characters becomes a more dovish crowd. There may be light at the end of this tunnel, but it’s a fairly long tunnel.
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Macro
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08:30 – Initial Jobless Claims (Weekly): Expecting 256K, Last Week 258K. The most consistent item in macro-economics will not likely rock your trading session. The four week moving average now stands at 253K, and you would probably need to see a print up around 280K in order to rattle some cages.
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08:30 – Non-Farm Productivity (Q3): Expecting 1.9%, Q2 -0.6% q/q SAAR.
08:30 – Unit Labor Costs (Q3): Expecting 1.4%, Q2 4.3% q/q SAAR.  These two items that truly go hand in hand have been perhaps the weakest link in this economy over the last three quarters.  Over that time worker productivity has persistently contracted to the tune of -2.2%, -0.6%, and another -0.6%. Unit Labor Costs have dramatically increased over that same time period by 3.3%, 4.5%, and 4.3%. People need not wonder why there is so little upward pressure on wages. The causes? Less business investment, rising health insurance costs, new employees in unfamiliar fields, large increases in part-time labor, or multiple jobs holders. You can pick your poison. The good news is that if expectations come to fruition, the third quarter will actually see production outpace Labor Costs, and break this awful streak. These two prints have the potential to move the WIRP.
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09:45 – Markit Services PMI (October -f): Flashed 54.8. Again, this release will have little to no impact on what you are doing at 9:45. Wait the fifteen minutes.
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10:00 – ISM Non-Manufacturing Index (October): Expecting 56.0, September 57.1. September was the strongest print of the year for the service sector. That print wildly beat expectations, and came just one month after the weakest month of the year in this space. What’s most important here is New Orders. That item posted at 60 in September. Anything close to last month’s numbers at the headline, and for New Orders will have be a plus for this economy, and supportive of a December rate hike.
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10:00 – Factory Orders (September): Expecting 0.2%, August 0.2% m/m. The expectations are for little change in September Factory Orders. In fact ex-transportation, the projection is for a flat print. The problems with this one is that this is dated information, and sometimes brings large revisions with it. For those reasons, markets will not likely react to this release.
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10:30 – Natural Gas Inventories (Weekly): Expecting 62B cf, Last week 73B cf. The beat goes on. This only matters to those directly trading the space. Projections are for a 23rd inventory build in the last 24 weeks, or for a thirteenth week in a row.
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Thursday’s Earnings Highlights
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Before the Open: APA (-.14), AVP (.04), BLL (.94), CI (1.90), IGT (.44), SMG (-.28)
After the Close: ATVI (.42), ED (1.47), FLR (.88), GPRO (-.34), MHK (3.46), SBUX (.55), TWLO (-.05), WTW (.45)

Market Recon Wednesday

Good Morning,
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Global Equity Weakness.
                     Equities are trading lower this morning across the globe. In Europe, and throughout Asia, the blame is being placed squarely upon Republican candidate Donald Trump’s late surge in the polls after markets had largely priced in a smooth transition from President Obama to Hillary Clinton. Uncertainty is certainly to blame, but I don’t think fear of a Donald Trump victory is the sole cause of all of this fear. Perhaps, the fear is that the outcome of this election creates uncertainty regardless of who might concede next Tuesday night. On one hand, you’ll have the unpredictable Trump, and on the other hand, even if the Democratic candidate for this office should prevail, her ability to govern will be greatly diminished due to her ongoing legal problems. Then there’s Oil. The collapsing price of Oil has plenty to do with this market weakness, and incredibly the price of crude has continued to move lower, even as the DXY has weakened in the early part of this week. OPEC’s promises are not being taken very seriously at this time.
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Fed Day.
                     The CME Fed Funds futures probabilities page only gives today’s announcement an approximate 7% chance of putting an interest rate increase to the tape.  December probabilities are up around 74% (down from 78%). Though much of the headline economic data has been just barely good enough to “not be that bad”, a lot of the internal statistics are still troubling. One example would be the poor Final Sales to Domestic Purchasers in the first look at Q3 GDP. Another would be yesterday’s October ISM print that showed headline expansion, while the pace of New Orders slowed, and Backlogged Orders (as well as inventories) disappeared. All is not well, though there are clearly some brighter spots in the economy in some places. The FOMC does seem to be on a mission, and if they are to call what we are in “a tightening cycle”, then I guess a quarter point a year would be the minimum. One should note that the lower US Dollar currency exchange valuation will afford the members of the FOMC a little more of a comfort zone when putting together this statement.
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Macro
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08:15 – ADP Employment Report (October): Expecting 167K, September 154K. This item does not pack the market punch that the Non-Farm Payroll print will on Friday. However, this item is meant to be a predictor for the Private payrolls (the lion’s share) portion of that NFP. This print was very accurate in doing so for September, and when averaged out over the long-term has been spot on. Equity index futures will react to any kind of sizable miss upon this release.
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10:30 – Oil Inventories (Weekly): Expecting -700K, Last Week -553K barrels.
10:30 – Gasoline Stocks (Weekly): Expecting -1M, Last Week -2M barrels. Headline Oil Inventories were expected to sport an eighth reduction in the last nine weeks today. With Crude in something of a spiraling collapse of late, any contraction in this space, and in Gasoline stocks would be helpful. However, last night the American Petroleum Institute reported an incredible 9.3M barrel inventory build for Crude, as well as a 3.5M barrel draw for Gasoline. This added to overnight suppression of oil prices, and will need to be confirmed by today’s release.
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14:00 – FOMC Policy Decision. This month, there really is not much of a chance of a change in monetary policy. Regardless, the Fed seems intent, in this statement to make sure that market participants understand that they are serious about December. There will be no press conference, nor economic projections made by Fed officials today.
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Wednesday’s Earnings Highlights
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Before the Open: BABA (.70), BG (.79), CLX (1.42), EL (.80), NYT (.04), TWX (1.36), YELP (.18), ZTS (.47)
After the Close: AIG (1.20), NLY (.29), DVA (.93), FB (.96), FIT (.19), WFM (.24), ZNGA (.01)

Market Recon Tuesday

Good Morning,
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Asia.
                    Surprisingly, the Chinese data that global economists were watching beat expectations for October. Both the Governmental (NBS), and private (Caixin) manufacturing PMIs came in on top of projections, as did the government’s number for the service sector. Does this suggest that the Chinese economy has found a bottom? New orders, the most important sub-component of any manufacturing report did show improvement, on a foundation of improved commodity pricing, and increased fiscal spending. Neither of which can be counted on long-term.  The Bank of Japan held their fire at last night’s policy meeting as expected. In their first decision since targeting the yield curve in September, the BOJ did push back their projection for hitting 2% consumer inflation from 2017 to 2018. Though expected, this solidifies the perception that global central banks have come close to the point where they feel that monetary policy has done about as much good as it possibly can. The horrific Japanese data for Industrial Production, and consumer level inflation released over the weekend would serve as evidence of a far less aggressive monetary nature going forward.
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Trader Focus / Utilities/ 2115.
                    With the FOMC in session, and the general election looming with all of the peripheral noise that surrounds it, there is no doubt we are all distracted from the task at hand. Our mission, as reminder is first to simply survive, and then to possibly excel in the environment provided. I present the curious case of the Utility Sector. Crude oil, and the US Dollar both obviously have great impact upon these markets. With OPEC , and OPEC’s pals seemingly walking around in circles, and with the perception in the US that rates are headed higher, both of these items should present headwinds to market health.
                    The slightly higher yields now seen in the Treasury market, and that perception already mentioned should also present a headwind to the dividend paying Utility sector. Yet, money is flowing into utilities…. over the last week, and over the last month while the general market has struggled. Could this be the trickle ahead of a flood into a defensive posture ahead of a significant market move lower? Take a look at the SPX 2115-2120 area. That spot has provided consistent support this Autumn. That same spot provided stiff resistance from last Autumn through this Summer. It may take a while, it may not even happen, but it’s on my radar. We are testing that area right now. Should that spot break, due to an election shock, or a breakdown in crude prices, or just because it’s time, the next stop will likely be around 2075, and could be as low as 2040.
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Macro
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All Day – Total Vehicle Sales (October): Expecting 17.5M, September 17.8M annualized. September was the second strong month in three for auto sales. the problem here, statistically is that 17.8M annualized units is a tough number to beat, and even if we see a strong (for 2016) print here, it could still pull October headline Retail Sales lower when we see that data in two weeks. This information is released piecemeal by the auto makers, and will take hours for the complete picture to form, thus reducing immediate market impact.
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08:55 -Redbook (Weekly): Last week 0.3% y/y. Until last week, the Redbook had a nice three week mini-streak going, at least on a year over year basis. Look for this one to slide back up to 0.5% y/y this week.
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09:45 – Markit Manufacturing PMI (October – f): Flashed 53.2. Last week, this item flashed decisively above expectations. That said, this is a non-event. They could probably put almost anything to the tape for this item today, and traders would wait for the ISM number fifteen minutes later.
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10:00 – ISM Manufacturing Index (October): Expecting 51.7, September 51.5.  I think after the experience of printing at 49.4 in August after a five month run above sea level, economy watchers will be pleased to see the pace of expansion simply hold it ground. This is the most important economic data-point of the day, and for any kind of change in narrative you would have to see a ghastly miss in this space. Given the way that Philadelphia and Richmond hit the tape, from a regional perspective this item will not likelly stray too far away from 50.
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10:00 – Construction Spending (September): Expecting 0.5%, August -0.6% m/m. This is a somewhat dated, wildly volatile item. After printing in contraction in four of the last five months, the expectation of growth in this space is refreshing. That said, the data presented here is not to be trusted until the second month as the Census Bureau is often forced to dramatically revise these numbers.
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Tuesday’s Earnings Highlights
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Before the Open: AEP (1.21), ADM (.46), BP (.04), COH (.45), ECL (1.28), K (,87), OSK (.86), PFE (.62), RDS.A (.24)
After the Close: DVN (.06), EA (.43), HLF (1.09), PZZA (.50), X (.84), ZNGA (.13)